Fossil fuel subsidies are a relic of the past

11 Aug 2017

Maurice Tulloch shares his views on fossil fuel subsidies and their impact on health and climate change.

The insurance industry exists to manage risk; as far as possible we aim to prevent or minimise the impact of losses before they happen. Burning fossil fuels gives rise to short, medium and long-term risks for insurers, investors, and our customers and society alike. And yet governments continue to promote the production of oil, gas and coal with subsidies.

The OECD estimates that $160bn to $200bn (£123bn to £154bn) a year goes towards supporting fossil fuel production and consumption in OECD countries and key emerging economies. This actively contributes to air pollution, health problems and premature deaths, as well as the increase in extreme weather events that comes with climate change. This policy costs taxpayers twice – firstly for the subsidies, and then again as public funds are needed to deal with health costs and climate change.

Just recently, the Health and Environment Alliance launched a report that laid out the costs of the health impacts that come from fossil fuel subsidies. In the UK, health costs arising from fossil fuel driven air pollution are almost five times higher than the subsidies paid. Over $6bn of public money is spent on the industry, and the health costs from premature deaths linked to air pollution run to over $30bn.

Globally, it is estimated that every year there are 6.5 million deaths from respiratory infections, strokes, heart attacks, lung cancer and chronic lung disease that are directly attributable to the combustion of fossil fuels. Besides the immediate public health impacts of bad air, the broader effects of climate change come with real costs.

A recent report by the Lancet Commission on Health and Climate Change made a compelling case that global morbidity and mortality rates are intimately linked to climate change.

Warmer temperatures create water scarcity and food insecurity in certain regions, resulting in malnutrition and even starvation. Deadly heatwaves have become a threat to one third of the world’s population. Viral pandemics are being exacerbated by warmer temperatures, as mosquito-born diseases like Zika and dengue fever thrive in a hotter, wetter world.

These combined impacts are taxing public health systems and private insurers alike, on top of the costs of property damage and loss brought about by sea level rises and storm surges, flooding, and other extreme weather events. Yet world leaders continue to underwrite one of the contributing causes.

The report argues that ending subsidies to fossil fuels would produce a rare quadruple win for society. First, national budgets could grow and deficits shrink with increased revenue from taxes currently unpaid by oil, gas and coal companies, generally delivered in the form of tax breaks and concessions.

Second, those budgets could go further with less to spend on the healthcare costs associated with local air pollution. Third, the current and eventual costs of reacting to and adapting for the impacts of climate change would be reduced.

Finally, the public would be healthier and more productive in the workforce, providing even more of an economic boost.

None of this is straightforward. There are people who rely on subsidised fuel. Any transition needs to be managed carefully to mitigate any social impacts and to ensure continuity of energy supply. And we must recognise the knotty issue of carbon entanglement, where governments and asset owners may be vested in the status quo.

The fact remains that having a price that reflects the true cost of the fuel would enable these discussions to happen with more transparency.

The G7 have, in fact, already promised to end fossil fuel subsidies by 2025. We should congratulate Canada, for example, for announcing moves to end its own subsidies in its recent budget. Italy, which next chairs the G20, has published a subsidy inventory.

These are steps in the right direction. They won’t solve the problem of climate change alone, and more countries need to get involved. But the fact remains that subsidies are ultimately unsustainable.

Maurice Tulloch is chief executive of international insurance at Aviva